Pension Problems Grow

July 23, 2010 6:51 pm

Expect to hear a lot about the state employee retirement system during the coming months and years. When you do, there are two things to keep in mind: One is that the biggest problem is what is known as the unfunded liability — in essence, money that is owed to future retirees that the state has failed to set aside. The second is that changes to the plan, such as switching to Social Security or decreasing benefits, will do nothing to reduce the unfunded liability, which now totals more than $4 billion.

In a nutshell, the problem is that several decades ago the state did not set aside enough money each year to meet its pension obligations. Over time, this led to a huge unfunded liability. In 1991, for example, the assets in the Maine State Employee and Teacher Retirement Program represented only 36 percent of the plan’s expected liability, among the worst in the country.

Because of this continuing shortfall, a constitutional amendment was passed in 1995 requiring that the state fully fund the retirement system by 2028. It also required that no new benefits could be added to the plan unless they were fully funded.

Another provision requires that market losses must be recovered within 10 years. This is especially problematic now because the pension system lost more than $2 billion in value when the stock market declined in 2008. That money must be returned to the system within 10 years whether the market recovers or not.

As bad as the situation seems, Maine is in a better position than many other states, says the system’s executive director, Sandy Matheson. Because Maine made changes in the 1990s, it has a path to reach full funding, although getting there will require difficult decisions.

According to an analysis completed earlier this month, the retirement system will cost the state $916 million over the next two years. That’s up from $629 million during the two-year budget cycle that ended June 30.

That figure accounts for both the cost of maintaining the program for past and present employees and paying off debts that accrued in years past when the program was inadequately funded. Ms. Matheson stresses that enough money is now being set aside to cover retiree payments, the so-called normal cost. The problem is sticking with a plan to eliminate the unfunded liability by 2028, a situation made worse by the stock market losses.

To continue to make those unfunded liability payments, cuts will have to be made elsewhere in the budget.

At the same time, there is much talk about changing the system going forward. A popular proposal is to put state employees, at least partially, into Social Security. While this would actually cost the state more — Social Security requires that employers pay 6.2 percent of an employee’s salary into the system, while the state system’s payment is 5.5 percent of salary — it would bring more stability.

This is certainly worth close consideration, but it does nothing to reduce the unfunded liability, which is where lawmakers must focus their attention.